Sentiment Risk Premia in the Cross-Section of Global Equity

72 Pages Posted: 28 May 2020

See all articles by Roland Füss

Roland Füss

University of St. Gallen - School of Finance

Massimo Guidolin

Bocconi University - Department of Finance

Christian Koeppel

University of St. Gallen

Date Written: May 16, 2020

Abstract

This paper introduces a new sentiment-augmented asset pricing model in order to provide a comprehensive understanding of the role of this new type of risk factors. We find that news and social media search-based indicators are significantly related to excess returns of international equity indices. Adding sentiment factors to both classical and more recent pricing models leads to a significant increase in model performance. Following the Fama-MacBeth procedure, our modified pricing model obtains positive estimates of the risk premium for positive sentiment, while being negative for negative sentiment. Our results contribute to the explanation of global cross-sectional average excess returns and are robust for fundamental factors, momentum, idiosyncratic volatility, skewness, kurtosis, and international currencies.

Keywords: Asset pricing, behavioral finance, financial markets, investor sentiment, sentiment risk premium

JEL Classification: C53, G12, G41

Suggested Citation

Füss, Roland and Guidolin, Massimo and Koeppel, Christian, Sentiment Risk Premia in the Cross-Section of Global Equity (May 16, 2020). University of St.Gallen, School of Finance Research Paper No. 2019/13, Available at SSRN: https://ssrn.com/abstract=3612778 or http://dx.doi.org/10.2139/ssrn.3612778

Roland Füss (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland
+41 (0)71 224 70 42 (Phone)
+41 (0)71 224 70 88 (Fax)

HOME PAGE: http://www.sbf.unisg.ch/en/Lehrstuehle/Lehrstuhl_Fuess.aspx

Massimo Guidolin

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Christian Koeppel

University of St. Gallen ( email )

Langgasse 1
St. Gallen, 9008
Switzerland

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